OST-97-3139 / 1997 US-Argentina All-Cargo / Supplement to Application of Federal Express / December 23, 1997

1997 U.S.-ARGENTINA ALL-CARGO FREQUENCY PROCEEDING

SUPPLEMENT TO APPLICATION OF

FEDERAL EXPRESS CORPORATION

Pursuant to Order 97-11-35, served November 20, 1997, Federal Express Corporation (Federal Express) hereby submits the following additional information and evidence as a supplement to its Contingent Application for three (3) U.S.-Argentina all-cargo frequencies in Docket OST-97-2594, which the Department has consolidated into this Proceeding.

1. Proposed U.S.-Argentina Flight Schedules

a. Background and Current Operations

Federal Express currently holds and fully utilizes an allocation of five (5) weekly U.S.-Argentina all-cargo operating frequencies under which it is permitted to conduct five roundtrip flights a week between the U.S. and Argentina utilizing narrow-body freighter aircraft.

On the basis of that allocation, Federal Express operates five roundtrip flights a week utilizing B-727-200 freighter aircraft, having an available payload capacity of 45,000 pounds, operating between Sao Paulo, Brazil and Buenos Aires, Argentina. Those B-727 flights connect on a change-of-gauge basis

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at Sao Paulo with daily DC-10-30 freighter flights operated by Federal Express between Memphis and Miami, on the one hand, and Sao Paulo, on the other hand. The DC-10-30 freighters have a total available payload capacity of 116,000 pounds southbound and 96,000 pounds northbound.

As demonstrated by the load factor statistics set forth in Exhibit JA-4 attached to the May 21, 1997 Joint Application of Federal Express, Arrow and FWIA in Docket OST-97-2548, the U.S.-Argentina traffic demand experienced by Federal Express has frequently exceeded the limits of the payload capacity of Federal Express' B-727-200 aircraft on peak days in the southbound direction between Sao Paulo and Buenos Aires. As shown in Exhibit FX-100, infra, the load factors on the B-727-200 operations of Federal Express between Sao Paulo and Buenos Aires averaged 79 percent of total available southbound capacity, and amounted to 88 percent of total capacity on the Santiago-Sao Paulo leg of the northbound flight from Buenos Aires to Sao Paulo (via Santiago), during the twelve-month period ending June 30, 1997.

The existence of those capacity limitations has seriously undermined the extent of service, and has adversely affected the quality of service, which Federal Express is able to render in the U.S.-Argentina market, by impeding the speed and reliability of that service, which are two of the key attributes of air express service. Because of the increasing urgency of the need to obtain relief from those capacity constraints, Federal Express has actively pursued an enlargement of its current five-frequency allocation in every available regulatory

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and bilateral negotiation forum, culminating most recently in the purchase by Federal Express of three additional frequencies from Arrow and Florida West which has been awaiting approval in Docket OST-97-2548 for the past seven months.

b. proposed Flight Schedules

Immediately following approval by the Department of the Federal Express-Arrow-Florida West Argentina Frequency Transfer Application in Docket OST-97-2548, and/or grant of the Contingent Application of Federal Express for reallocation of three Argentina frequencies in Docket OST-97-2594, Federal Express will expand the scope of its existing scheduled all-cargo service between the United States and Argentina by substituting the DC-10-30 freighter aircraft in place of its present B-727-200 operations between Sao Paulo and Buenos Aires (and beyond to Santiago). That service expansion, which requires a total allocation of eight (8) U.S.-Argentina cargo frequencies under the established narrow-body frequency conversion formula, will be accomplished by simply extending five existing Memphis/Miami-Sao Paulo DC-10-30 flights a week beyond Sao Paulo to Buenos Aires and Santiago.

A detailed description of the foregoing planned DC-10-30 freighter service to and from Argentina, showing all points served and aircraft routings, departure and arrival times, days of the week operated, and annual operating statistics, is set forth in Exhibit FX-101, infra.

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Federal Express is prepared to commence the foregoing expanded service within 30 days after the receipt of final authority from the United States and Argentina governments to begin using the DC-10-30 freighter aircraft in its U.S.-Argentina operations.

There will be no downward seasonal adjustment of the foregoing basic five-day-a-week flight schedule, which is an essential requirement for air express services involving the movement of urgent and extremely time-sensitive shipments. To the extent possible under the currently-effective bilateral agreement between the U.S. and Argentina, Federal Express may seek to operate additional weekly flights to accommodate surges in traffic demand on peak days and during peak seasons of the year.

The U.S.-Argentina flights operated by Federal Express provide highly reliable, expedited and efficient air express and time-definite air freight service between points in Argentina and the entirety of the United States, and to and from points beyond the United States in Canada, Europe and the Asia/Pacific region served by Federal Express on its worldwide system operations.

2. U.S.-Argentina Cargo Traffic Forecast And Projected Capacity As shown in the Information Response previously filed by Federal Express in this proceeding, Federal Express carried a total of 1,736 revenue tons of cargo and express traffic between the U.S. and Argentina in both directions, and an aggregate unduplicated total of 26,803 revenue tons on its combined DC-10 and B-727 operations between the U.S. and Brazil/Argentina, including markets

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behind the U.S. and beyond Argentina, during the 12-month period ended June 30, 1997.

A detailed forecast of the traffic projected to be carried by Federal Express during the forecast year ending December 31, 1998, broken down by market and by direction, as specified in Order 97-11-35 (p. 8, pare. A.2.) is set forth in Exhibit FX-102, infra. /1 In summary, Federal Express forecasts that it will carry the following volumes of traffic, by direction, during the forecast year:

The total cargo capacity available on the flights proposed to be operated by Federal Express between the U.S. and Argentina, and the total

1/ It is important to note that the design and capabilities of the Federal Express hub-and-spokes flight network makes the provision of "single-plane" service, as referred to in Order 97-11-35 (p. 8, pare. A.2) completely irrelevant to the quality and reliability of the express service offered by Federal Express. For example, a shipment from Klamath Falls, Oregon to Buenos Aires on Federal Express might travel on as many as four different Federal Express flights, but would be delivered on the second business day by Federal Express to the consignee's door in Buenos Aires.

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capacity projected to be occupied by various categories of local and beyond-market traffic, is set forth in Exhibit FX-103, infra.

3. Aircraft Availability

As noted above, Federal Express plans to utilize the DC-10-30 freighter aircraft in its expanded Argentina operations. The DC-10-30 aircraft to be operated by Federal Express to Argentina are currently being operated by Federal Express between Memphis and Miami and Sao Paulo, Brazil, at a frequency of nine (9) roundtrip flights a week (see Exhibit FX-105, infra). The expanded Argentina service proposed by Federal Express involves the simple extension of those existing DC-10-30 flights five days a week over the 1,039-mile segment between Sao Paulo and Buenos Aires (Exhibit FX-101, infra).

Federal Express currently owns or leases and operates a fleet of 601 aircraft, including forty-one (41) DC-10-10 and twenty-two (22) DC-10-30 freighter aircraft, as shown in Exhibit FX-104, infra. The DC-10-30 aircraft to be operated by Federal Express in operations between the U.S. and Argentina fully comply with the Stage 3 noise limits established by FAR Part 36. There is no question that Federal Express has DC-10-30 aircraft on hand and immediately available for use in providing the expanded Argentina service proposed by Federal Express in its two pending applications at issue in this proceeding.

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4. Existing U.S.-South America Operations

Federal Express currently holds certificate and exemption authority authorizing it to serve six countries in South America, as follows:

Federal Express currently operates scheduled all-cargo air service to each of those countries (except for Colombia, which Federal Express has only recently acquired authority to serve) at a frequency of at least five days a week throughout the year. The current flight schedules operated by Federal Express between the U.S. and points in South America, showing aircraft type, frequency, routing, day of the week and arrival and departure times, are set forth in Exhibit FX-105, infra. /2

The total number of scheduled flights operated by Federal Express between the U.S. and South America, by market, by direction, by month, for the 12-month period January 1, 1996 through December 31, 1996 is set forth in Exhibit FX-106, infra.

5. Statements In Response To Interrogatories

a. Start-Up Condition

Federal Express is willing to accept a condition imposing a mandatory start-up date on any Argentina cargo frequencies transferred or allocated to

2/ Federal Express currently serves Montevideo, Uruguay, through a 5-day-a-week interline arrangement with a Uruguay carrier which operates daily small-aircraft service between Buenos Aires and Montevideo.

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Federal Express in this proceeding. Such a condition, if imposed, should be identical to the Department's standard 90-day startup condition imposed in other recent cases involving limited-entry international markets.

b. Willingness To Accept Fewer Frequencies

Federal Express has applied for three additional U.S.-Argentina frequencies, which is the minimum number required to enable Federal Express to operate the DC-10-30 freighter aircraft at a frequency of five roundtrip flights a week. That frequency is an essential requirement for the performance of expedited air express operations which involve the transport of urgent and extremely time-sensitive shipments every business day.

Federal Express would be willing, but extremely reluctant, to accept an allocation of fewer than three additional frequencies, including as few as one or two frequencies, but such a limited allocation would severely undermine the ability of Federal Express to handle its existing and projected future U.S.-Argentina traffic requirements.

c. Reliance on Second-Carrier Cooperative Arrangements

The U.S.-Argentina services proposed by Federal Express will be operated by Federal Express using its own aircraft and crews, and will not be

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operated pursuant to a wet-lease or other cooperative arrangement with any other U.S. or foreign air carrier.

Respectfully submitted,

Nathaniel P. Breed, Jr.

• FX-100 Federal Express Load Factors on Existing B-727-200 Operations Between Sao Paulo and Buenos Aires
• FX-101 Planned U.S.-Argentina DC-10-30 Flight Schedule
• FX-102 Federal Express Traffic Forecast For Year Ending December 31, 1998
• FX-103 Federal Express Available Cargo Capacity On Proposed U.S.-Argentina Flight Operations
• FX-104 Federal Express Current Aircraft Fleet
• FX-105 Federal Express U.S. -South America Flight Operations
• FX-106 Total Number Of U.S.-South America Flights Operated By Federal Express During The Year 1996